Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

Elisabetta Iossa and Patrick Rey

No 155, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: Due to technological progress, recent performance is often more informative about future performance prospects than is older performance. We incorporate information decay in a career concern model in which performance depends on type and effort and contract renewal is based on the performance record. In contrast with the career concern literature (e.g. Lewis, 1986; RJE), contractors work harder when the project approaches renewal date and when their reputation is better. Productive investment are crowded out by window-dressing effort in late contract periods, but it is boosted in early periods. More frequent contract renewals strengthen reputational effects and result in improved performance if the relative cost of investment is low, but otherwise long-term contracts induce more effort. Our results are corroborated by some empirical studies showing that performance improves as the contract approaches renewal date.

Keywords: Career concerns; contract renewal and dynamic incentives. (search for similar items in EconPapers)
Pages: 46 pages
Date: 2010-05-28, Revised 2010-05-28
New Economics Papers: this item is included in nep-bec, nep-cta and nep-ppm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: BUILDING REPUTATION FOR CONTRACT RENEWAL: IMPLICATIONS FOR PERFORMANCE DYNAMICS AND CONTRACT DURATION (2014)
Working Paper: Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration (2013)
Working Paper: Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration (2012)
Working Paper: Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration (2012)
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